Should the UK print money as Lord Turner wants us too?

Today Lord Turner will give a speech on monetary policy and it is considered important enough for the Financial Times economics editor Chris Giles to interview him on the subject. If we move towards the end of the discussion we get this.

Chris Giles: There will be some people who think that, by taking it out of the box, you’re just a very bad man and a very dangerous man.

Lord Turner: A very dangerous man.

Firstly we need to clear the air a bit as Lord Turner comes with quite a lot of past baggage. He was a prime advocate of the UK joining the Euro and I still shudder to think what would have happened to the UK housing market if our interest-rates had been set to suit Germany! We get a clear guide I think from what has happened in Ireland and Spain where extreme boom has led to extreme bust. Also he became chairman of the Financial Services Authority in 2008 and the Libor scandal was on his watch and we see that nothing was done about it when the evidence was clear and it looks much more likely that things were hushed up instead.

So he has been dangerous on at least two fronts but these are not the ones meant! You might already be wondering why he is listened too with such a track record but for our so-called elite failure appears not to be a barrier at all. Indeed when I reviewed a speech of his on October 12th last year he was confessing to his part in yet another error.

For the last year, the FPC has been struggling with a trade-off – and I suspect our communication might have been clearer if we had been more explicit about how difficult that trade off is.

Oh and “struggling for a trade-off” is defined in my financial lexicon as doing things which are mutually exclusive at the same time.

So it is monetary policy where Lord Turner is dangerous?

Yes it is this area where he fears such a title and if we go back to October 12th we had in fact seen him set out his stall on this.

So optimal policy also needs to include a willingness to employ still more innovative and unconventional policies

Those who have followed my updates on the collapse of the Irish banking system may already have a chill going up their spine at the use of the word innovate,which in practice meant more and more problems were created. Also for those in the central banking world what they call “unconventional” has become the convention.

He sets out his stall

Whilst he tries to smokescreen this element we are told Lord Turner’s philosphy here.

the management of the pace of increase of aggregate nominal demand

You see he thinks that a “manager” can press a few buttons and twiddle a few knobs and hey presto we will be better off. Of course the manager he has in mind is himself! At which point I would refer you to his ominous and poor track record above. He would be more likely to be like the beginning of the Simpsons where Homer Simpson sits in front of the buttons at the nuclear power station and presses the wrong one.

He spends a bit of time denying this in his interview a bit like Mervyn King who also often contradicts himself. But like Arnie it is soon back.

Fundamentally, I think the framework we have to have is that there are a number of levers, monetary policy, fiscal, etc, which can implement aggregate nominal demand.

Yet another Lord Turner mistake

And I think there’s the insight that almost nobody, and certainly not myself, was quick enough to understand in the middle of the crisis in 2008 and early 2009.

Still catching up four or five years later is okay is it not? After all it is not as if he is a compulsive level puller and knob twister based on self-confessed mistakes…Oh wait a minute! Also “almost nobody” goes into my financial lexicon as you will find arguments on here about bank reform from my early blogging days and on the other side of the argument economists like Richard Koo were discussing deleveraging too.

Lord Turner presses on regardless

there may be a big potential at the moment, and I think the Federal Reserve definitely believes this, to stimulate growth without an inflation effect.

Readers in the UK may already have rising blood pressure at this point after 37 months of above target inflation. Never fear the next discussion is of a higher inflation target which Lord Turner tries to appear tough by rejecting,after of course giving it the oxygen of publicity one more time. But then we get to a suggestion which is very popular these days amongst central bankers.

how do central banks pre-commit, believably pre-commit to a future path of interest rates, which establishes expectations today compatible with medium-term inflation

Believe it or believe it not this theory argues that as long as a central bank promises to be tough in the future it can be as loose as it likes now with monetary policy! The fact that it makes them look like alcoholics or junkies does not seem to stop them. They are always about to stop tomorrow! Indeed Lord Turner calls it an offshoot of rational expectations theory when any belief in this looks purely irrational to me.

Indeed a familiar refrain then breaks out.

I think that can take one to an area of should one allow for nominal GDP growth up to some level

How would he do this?

The emphasis here is mine.

Well, they’re never maxed out. In terms of their impact on aggregate nominal demand, they’re never maxed out if you are willing to go to overt money finance

Ah so we finally get there! Also we get a hint as to how far he would be willing to go

So you’re certainly right that I have concerns that the package of measures, which are monetary, macro-pru, credit easing, are subject to declining marginal returns.

So we are into a category which I have satirised and explained as “More,More,More” these past three years of blogging. These policies are promised to work but when they do not-look at the UK’s enormous monetary stimulus but lack of growth in response- it is always because they did not do enough rather than them being wrong. It is odd that the concept of being wrong does not seem to occur to someone who has been wrong as often as Lord Turner has.

The taboo itself

After a very confused section where Lord Turner keeps tripping over his support for QE we get to the heart of the matter.

Is it desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not.

Also we see that he thinks it equivalent to other policies in its effect.

There is no inherent reason why it produces a less favourable division between inflation and real output than any other.

Actually we can review that in terms of his words earlier in the interview.

there is a real danger that, in pursuit of that, you’d be going to four, five, 6 per cent inflation and that you would end up creating medium- and long-term inflation

All roads lead to inflation? Well in Lord Turner’s world they seem to. But fear not.

And it clearly doesn’t produce hyperinflation because it is clearly quantity dependent

Glad that’s clear Adair!

Comment

Let me open by saying that if we look through the somewhat confused fog of this interview we see that two elements do exist and are options. For example monetary policy can always be eased should you choose and so there is no “maxxed out” and direct monetary financing often called printing money where the central bank in effect finances government deficits is also a policy option. Indeed in an extreme of a deflationary and disinflationary collapse it may even be the only option left. I have pointed out before that perhaps the nearest we have to that right now is Japan although we have the issue there of why the existing stimuli have failed.

However we then get to the problem that is Lord Turner. You see he is a levers,knobs and stimulus man which if we apply the rational expectations he hopes for means logically that he will fail.Ooops! His credibility in terms of tightening policy later may have the support of what Brian Clough famously called a “class of one” in other circumstances. I am sure that many of you reading this will have spotted that the plans he is trying to push are just another form of can kicking. You may also spot that his support of QE admits now to “diminishing returns” but he is unable to connect what I think is the fundamental problem facing UK economic policy and here it is.

In the UK, over the last 3.5 years, since the trough of 2009, about 80 per cent of the increase in nominal GDP has been expressed in a price form

In many ways he has just given the best critique of his own past and indeed present views. Oh perhaps someone might give him a nudge to point out that the calculation of the GDP deflator was changed as his section here looks at best rather ill-informed.

1. Innovate=to do something dangerous, but which no-one understands and will defer any real restructuring

2. Lord= a term used for those who are in a special elite where despite manifest failure, they are listened to (sub-categories include the Mandelson)

3. Sir (as in knighthood), a second category of utter failure being turned into reward (as in Sants)

4. Inflation= a word meaning that various public figures wring their hands about and express concern, but do nothing about

5. Above-inflation rises= what utilities do every year (see trains, water, electricity) despite “fierce” regulation. Somehow, we plebs are supposed not to notice that this erodes our pay (see section on below-inflation rises!!)

6. Deficit= something that is always coming down, under control, on target

7. Debt= exactly the same as deficit above

8. Cuts= wicked rich people wanting poor people to starve in the street despite both debt and deficit coming down and despite overall spending rising (itself a fiercely guarded secret)

9. The eurozone= a special area where official figures of GDP/unemployment/confidence/output do not count, because “it is past the danger point”

10. Stock market= a mass of speculators who believe 9 above!!

As you can, my blood pressure did indeed rise on reading your blog or rather at the absurdity of listening to lord Turner…

Anonymous

Very good James! May I extend (4) by adding: … do nothing about because it’s their hidden policy to use inflation to shift wealth about society and deflate state debt.

Your point (9) is spot on. Merkel the procrastinator has a lot to answer for.

Pavlaki

Nice one!

Justathought

Hi Shaun,

Excellent blog as always, if I was still living in the UK, at the read of this interview not only my blood would had drastically rose I will probably have blown a fuse… Living presently within the “zerozone”, I have learnt to diffuse and to detach myself enough to be able to laugh at the comments of the so call elected/non-elected elites. I entirely support the desire from the UK people to move out the present form of the EU however I wonder what would happen when reading that type of interviews from UK policies makers. What are they really trying to achieve??? Don’t they have realised yet that the next 20 years will be vastly different that the past twenty one???

james

you ask two questions there, to which the answers are respectively:
1. They seek publicity for themselves
2. No.
That is it

Justathought

Hi James,

In light of your comments and the latest IFS report (published
by Stephanie Flanders BBC), it seems we are heading faster to deep change. “When the citizens believe that their culture is no longer worth saving than societies collapse”. “Unfortunately;
no omelettes without breaking eggs”.

Thank you for the excellent column, Shaun. I don’t live in Britain so I don’t know that much about Lord Turner’s previous policies but I do know that the next Governor of the Bank of England, Mark Carney, shares Lord Turner’s enthusiasm for pre-commitment. It is obvious that for him his moment of shining glory was when he took the Bank of Canada’s overnight rate from ½% to ¼% in April 2009 and promised to keep it there through 2010Q2 consistent on the inflation outlook. (So it was a quite different pre-commitment from what Chairman Bernanke recently announced, which was conditional both on the inflation rate and the unemployment rate. And he more or less kept his word, as the overnight rate only went back to ½% in June 2010. He likes to cite a paper by the American economist Michael Woodford that shows the pre-commitment announcement had an impact, although Woodford never showed it had a favourable impact on output or employment.

I am agnostic on the issue, but it does seem like a lot of fuss over what is finally, just a verbal promise. As you say, some people in the market may disbelieve the pre-commitment and think the central bank will keep stoking up inflation no matter what. Others may on the contrary believe the central bank will remove stimulus when it suits them, never mind the pre-commitment to a low rate of interest. Unless it is actually legislated, it is hard to see it having a big effect on the market.

But for Carney the April 2009 announcement was obviously a very big deal indeed. He talks about it like Bob Beamon would his world-record long jump in Mexico City.

I hope tomorrow the Treasury Select Committee isn’t so pre-occupied with pre-commitment strategies, QE and the other stuff that they totally ignore the fact that this is a man who renewed the Canadian inflation-control target in November 2011 without making a single change to it or even acknowledging the European efforts, where Britain has been a key player, to develop price indices for owner-occupied housing based on the net acquisitions approach. Presumably he thinks the ideal target inflation indicator for the Bank of England would be the total RPI, since in its concepts and methods it is almost identical to the CPI All-items that the BoC targets. This should strike a number of Britons as a tad odd, even reactionary.

Rods

Hi Shaun,

Another excellent blog and analysis of those in charge.

If you were an employer would you employ Lord Turner or most politicians? I know I certainly wouldn’t! Most of them are totally unsuitable for the jobs they are performing with no relevant experience, no integrity and little aptitude to grasp what is required of them. Hollow words and sound bites don’t make up for knowledge, understanding and sensible deeds.

With public, private and industry debt about 500% of GDP we know it can’t and won’t be paid back with pounds at today’s value, but at some debased rate in the future. The same applies to the US.

His interview and also the speeches of the new BOE chairman are a softening up process to get us used to much higher inflation. We know they are going to turn the money taps on full bore and have the printing presses running flat out. Printing money and creating inflation is a bit like drill a hole in a high pressure water pipe, easy to do but plugging the leak and stopping the flood are not so easy.

I think this expectation of debasing the currency is having an effect where investors are selling pounds which is weakening the currency (a BOE policy) and of course increasing inflation for all those items bought with foreign currency, including the basics like energy and food. At the moment it seems you only seen to have to talk about something and it has the desired effect!

Unfortunately, having lots of pounds sloshing around in the economy doesn’t seem to be doing much for demand and growth, so it will just end up as the fuel for inflation. There will have lots of negative effects for those with savings, on fixed incomes and pensioners but it may help to rebalance the economy a bit if public sector pay settlements are kept low.

Anyway I must press on as I’m working hard and getting the relevant experience to become Chancellor and I’ve another pile of towels to refold!

Rods

Very good!

http://twitter.com/silentfp Chris F

Excellent post Shaun.

It brings me to a broader question – where do people like Lord Turner get their economics? It’s almost as if the Economic Elite, with access to the levers etc, all receive one pre-approved pamphlet a year on economic policy, (for 2013 it’s NGDP). There’s absolutely zero reference to alternative views, or critical thinking, or evidence, just the same broad waffle from a position of experience, aimed at the next big global wheeze, invented 20 years ago and never tested successfully.

Their economic knowledge seems to have missed all the Big things, capital, people, and their interactions, and instead skips to technical journals from 1984 as if all the other questions have already been answered definitively.

Course, since they never really mix with people other than themselves, and they’re unlikely to be exposed by the media, it’s pretty easy to do.

It’s just… the sheer bloody laziness of it all.

All these policies are debunked regularly by brilliant writers like yourself, Frances Coppola, Yves Smith (and many others), but these big cheeses act as if they have zero awareness of any alternative views.

As Rods said earlier, these know-alls without a clue and a terrible track record shouldn’t be anywhere near a salary related to economics.

[Examples include Lord Turner, Mervyn King, and anyone appearing on telly or in print as the "Chief Economist of XXX Bank" who bases everything on the FTSE movement].

Andy Zarse

Lord Turnip. Really just where do you start on somebody like this? You could usefully have added that his tenure at the FSA has seen the destruction of workplace retirement savings and the removal of the availability of financial advice to anyone who can’t afford to pay a three figure sum per hour. What an impressive individual he is.
He reminds me of the mad researcher Dr Bernado, a character beautifully played by John Carradine in the Woody Allen film;

Victor: Doctor, I read a statement you made that you felt that the average length of a man’s ***** should be nineteen inches. Doesn’t that seem a little long?
Dr. Bernardo: Long? My friend, I’m making discoveries you wouldn’t dream of…

taurus

Slightly away from the immediate topic under discussion, I caught the end of a news item where, the RBS fine for their part in the libor rate-fixing scandal, was being discussed with a spokesperson for the Banks. As RBS is mostly owned by the UK taxpayer the interviewer had the temerity to suggest that the fine should be paid by those bankers earning huge bonuses and not the taxpayer. The Banks’ spokesman retorted if that happened all these high quality bankers would leave London to seek their fortunes at other banks in other places of the world, and that we the GB taxpayer would ultimately be the big loser as a result!
What struck me was, even after all that has happened, the penny hasn’t dropped with many at the top of the banking industry that the only reason they have a job, and that their banks still continue to exist, is because of the tax funded bailouts through our governments ‘to big to fail’ policy and that the same applies elsewhere in the world (even within the last week or so the Dutch government has had to nationalise SNS Real Bank)
Then again, to draw on another football analogy, perhaps ‘ top’ bankers see themselves as the equivalent of ‘top’ football managers who move from club to club, underachieving on a grand scale or causing chaos, yet seemingly always able to find another club eager to uitilse their ‘expertise.’

DaveS

I don’t think they will keep public sector pay much lower than inflation.

They can’t inflate without inflating wages – real term drops in wages are not good for a consumer economy – so they won’t hit their new nominal GDP targets. Also it kills the golden goose – the housing market as the plebs struggle to service mortgages after paying for food, utilities & transport.

I think they are about to switch on wage inflation and it will likely be led by the public sector. There are hints of it now with councils paying the “living wage” but it will take a Labour government to pull the big red lever – “fair days pay for fair days work”.

I suppose the one way around this is to expand tax credits. It seems we already have an economy where large numbers of people are subsidised by the government to work for low wages. They could ramp up tax credits without ramping up wages and monetise the resulting hole in the government coffers. But thats a tricky reversal of policy even for Labour ?

And I suspect we need a lot of inflation – we needed 330% in 70′s and a further 200%+ in the 80′s, Our public & private debts are much worse now – so likely will be higher and also a good chance it will ignite into hyper-inflation. Pick a number – how about a 1000% – will that be enough I wonder ?

Of course it won’t work, perhaps they know that. We had a much more balanced economy in 70′s with balanced trade and manufacturing at 30% of economy. We probably still needed the North Sea to pull us out of the nose dive. This time we are in much worse shape and North Sea decline will add to the misery

geoffk

As someone who lives off their savings and is only 48 I realize that at some point i may have to enter the world of work again..

I am just coming to the end of a 5.5% five year bond (i can only dream of that today) and inflation is my biggest enemy but reading the above it looks like yet again the real enemy are the people at the head of the pile..

As the song by Jerrod Niemann
Hope You Get What You Deserve says

Hope you get what you deserve.

What goes and comes around.

Sure you’ve got it coming back to you.

Cause karma has a funny

Way of settling all the things we do

forbin

Hello DaveS.

I think the private sector will not be able to raise wages to any extent at all. The result will be more industry leaving until practically none is left.

So wage inflation will lead to less industry which will lead to more services ( possibly – who will pay for them? )

As you say only the Public sector can give larger wage increases but which cannot be funded by tax revenues leading to greater debt…..

However I see it that this will have to be the Wests plan, not just the UK. The looser being China and India

Interesting times indeed and this could spiral out of control easily as our incompetent leaders are scaring me !!

Obviously we will be poorer but the pound in our pocket will still be a pound – we just wont be carrying any copper or silver coins – they will become novelties for the grandchildren.

The pound will just drop in value – very considerably, but not against other Western currencies so much because
the whole of the West will be inflating too.

And that is what makes it more dangerous. to our incompetent leaders it becomes a viable exit. In isolation they might not risk it.

I wouldn’t be so scared if I thought it could work………..

JW

Hi Shaun

OECD agree, more QE required. They have to, you know this, its the only way to service the debt. Its not ; QE will lead to growth; rather its, no growth therefore more QE required.

Having sampled many economics/finance blogs I now realise why I enjoy yours so much. You don’t try to over-complicate to make yourself seem clever ( a trait of most ‘amateur’ economic pundits as well as the so-called professionals). You know your stuff so you can keep it simple.

Keep up the great work.

Justathought

Hi Forbin…not to sure about India, China is definitively not a loser… Going deeper within your analysis… a country who can not supporte/sustain his own population itself with food, regardless of energy will become a loser. I am afraid that the British Islands, the EU and others countries might one day have a rude waking up. and when people are hungry…

Anonymous

Thank you, there are some new variations there for my lexicon!

Anonymous

Hi Andrew
This pre-commitment argument strikes me as an utter fantasy or delusion where central bankers and reality part company! After all how many people actually follow their deliberations? Also their record which is mostly one of weakness is against them too…
I read Michael Woodford’s paper at the time of the Jackson Hole meeting where it gained a lot of publicity but on both this and nomianl GDP targeting I was not convined by it.
If only we had used net acquisitions for CPIH rather than rental equivalence. At the meeting at the Royal Statistical Society I attended it was quite plain from the evidence that NA was better than RE andso I can only conclude that RE was chosen for other reasons. Indeed the data on it in recent times may even show it to be an anti-indicator…
But I entirely agree with your premise that those in charge of central banks should take an interest in the targets they are set. I cannot forgive the 2002 version of the UK MPC who so supinely accepted the swutch from RPI to CPI.

Anonymous

Hi Chris

I like your idea of the “one pre-approved pamphlet a year on economic policy” ! It is not far from what I believe although I have characterised it in my mind as a type of self-supporting groupthink. They meet together tell each other how clever they all are at places like Davos and the job is done is it not? I have not quite figured out how they deal with the continual failure and the best I have managed is that they feel that it happens in spite of their intelligence!

The saga of Vicky Price who I read is a “respected economist” (although I note they never say by whom) has been revealing. She has been in major government posts but when I have heard her talk she has displayed no insight. Now if we put the politics to one-side she failed to spot that she was incriminating herself! So it would seem that another phrase goes in my financial lexicon.

Anonymous

Hi Andy
Ah yes the RDR financial advice shambles, the list just goes on and on doesn’t it?

Anonymous

Hi Taurus
BBC News 24 has some bizarre interviewees on its business section of which the latest I saw said that we should stop troubling the banks and let them get on with it! This was in relation to the Libor scandal and he didnt want anything else “raked up”.
Sadly the BBC business presenters are either supine or simply so unaware they do not realise what is being said and so the oxygen of publicity is given to such rubbish.

Anonymous

Hi JW
Thank you. As for the OECD they have not exactly covered themselves in glory have they?

http://www.facebook.com/george.sandy.142 George Sandy

Based on his track record, if Lord Turner wants something done, then we should choose to do the opposite!

Jan

Me too! I sold my house and have downsized twice since 2006 and am living off savings until I can draw my old age pension. Since stopping working for a living I’m working at making my life simpler and cheaper. I’m experimenting with growing some food in my tiny garden and cooking from scratch etc. I’m debating with myself whether I really need my car any more (don’t need it for work) and certainly won’t replace it when it finally conks out. I can travel off-peak when rail fares are much less. I think my living costs are hugely reduced now I have given up working for a living.

Shaun Richards is an independent economist who studied originally at the LSE. His speciality is monetary economics and he uses it to analyse current economic trends. He started his career in the City of London in 1985 and brings his trading experience in bond, currency and derivative markets to his analysis of current economic events. Follow him on twitter @notayesmansecon.